Really, the only way DF entities resembles real creatures is that there are labels applied to them.
Like, if you make a paper cut-out doll and cut it in half, you're just as guilty of murder as if you "kill" a creature in DF. Any connection with the real world is just labels.
For example, draw the letter 'd' on the screen and tell people "the d represents a dog". Then give the dog a single numerical value: hunger. The 'dog' now consists of three values: x, y on the screen and a 0-100 for hunger. Then, put food in a different cell, and say if "dog_hunger > 50%" then the 'dog' moves towards the food. Now, some people would say that "killing" this dog is actual murder, and that it's for-reals "cruel" to not let the "dog" reach the "food". Those people are idiots. All that actually happened was a letter 'd' didn't get to overwrite the letter 'f' on a screen. It's just the letter 'd' being moved around based on some extremely simplistic math. DF dwarves aren't different in design to what I just described, they just have more "values" in them, and a wider range of hard-coded if-then statements.
When a Dwarf becomes "unhappy" all that happens is that a linear "happiness" value drops, and a log is generated "dwarf X is unhappy because <trigger>". The reason for the unhappiness is not even coded into the dwarf's state, so how can be "unhappy" "because" that thing happened. As far as the dwarf is concerned all that happened is one of their arbitrary stats decreased. The dwarf doesn't "know" that it's their happiness stat, that's just an interpretation that's externally applied after the fact.
EDIT: What we're really talking about with real-world sanctions would be outlawing imaginary violence. If you imagine yourself killing someone, the model of the entity you're killing in your imagination is far more detailed than the model of entities in Dwarf Fortress. Your brain is a far more powerful simulation device after all. So we should ban thinking about killing or cruelty then, because by doing so we create simulations of the victims in our minds, and it's cruel to have the simulations go through that. So the crime of Dwarf Fortress would be that it allows you to create simulated beings in your own mind, which then suffer and die, so that would be banned not because of the suffering of the creatures actually "in" your PC, but because it creates simulated suffering in your own brain. And then we'd have to effectively ban anything that mentions suffering whatsoever.
EDIT2: so in effect, it makes no sense to ban DF for simulated suffering up until the point where the modeled creatures exceed the level of complexity of things you can imagine in your own actual brain. Imagine a dwarf with a big bushy beard in his workshop, he's thirsty, picks up his axe and goes to get a drink. Out in the corridor he's suddenly accosted by goblins who have over-run the fortress. "Help help, I'm being disemboweled" says the dwarf as the goblins set upon him with their nasty daggers and short swords. Now, I've created a simulation of a dying dwarf in your brain far more detailed than any DF character: there are detailed 3D entrails being ripped out, which I've just enhanced into HD definition by merely mentioning them. If 40 people read this I should get 40 life sentences. If you each read that twice, I should get 80 life sentences because you can kill dwarves over and over again by reading that again.